Sunday, December 24, 2017

LOST LEGACY'S STANCE OF THE INVISIBLE HAND IS ENDORSED

Michael Emmett Brady, California State University, has written an excellent article on Adam Smith’s use of the’invsible hand’ metaphor, its intended meaning and its misuse by Paul Samuelson in his exceptionally successful Econ 101 textbook, Economics, (1948, and another 14 editions to 2010, plus numerous translations, altogether upwards of 5 million copies sold, plus a lively second-hand used-book market).

The wide circulation of Samuelson’s textbook, and his later prestige as a Nobel Prize-winner, created the modern myths of Adam Smith’s meaning in his use of ‘an invisible hand’ as a metaphor, that now dominates the disciplne and also dominates modern public media at all levels across all countries in the world.

Almost single-handedly, Paul Samuelson’s version of Adam Smith’s use of the ‘invisible hand’ metaphor dominates the economics discipline, both in academe and in popular media and discourse, since Samuelson published his textbook in 1948. In it he wrote:

“Even Adam Smith, the canny Scot whose monumental book, The “Wealth of Nations” (1766) represents the beginning of modern economics or political economy—even he was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of the “invisible hand” that each individual in pursuing only his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious. This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their course course in economics. Actually much of the praise of perfect competition is beside the mark. As has been discussed earlier is a mixed system of government and private enterprise, as will be discussed later, it is also a mixed system of monopoly and competition. It is neither black or white, but gray and polka-dotted.”

Interestingly, Paul Samuelson in the same paragraph diss-associated himself from his own bold assertion but readers of his textbook have ignored the implications of him doing so:

“This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their course in economics.” (Samuelson, 1948, p 36)

Most economists ignore Samuelson’s partial disavowal and continue to repeat the original headline assertion about Adam Smith’s alleged proclamation of the:

“mystical principle of the “invisible hand” that each individual in pursuing his own selfish goodwas led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious”.

(Note the simile, 'as if' whichcorrupts Smith's actual metaphor).

Adam Smith is believed by Samuelson’s readers - that is about 5 million purchasers of his book, plus the large used-book market across its 19 editions - to have used the invisible hand metaphor to show a connection between the ‘invisible hand’ and market activity. (See Kennedy, G. 2010, ‘Paul Samuelson and the Invention of the Modern Economics of the Invisible Hand’. History of Economic Ideas, xviii/2010/3)

These believers included the top echolons of the economics profession across all of its schools and campuses, including Nobel Prize winners, holders of the most prestigious professorial Chairs, members of the editorial boards of the leading professional Journals, presenters at scholarly conferences, and graders of exam papers who were/are agreed on one thing, whatever their other academic differences, that Adam Smith’s alleged ‘invisible hand’ teaching was a significant historical contribution that is beyond challenge. In short, the false claims of Samuelson, and all those colleagues who accepted his assertions, dominates our scholarly work in economic theory and history. They are also in error.

However, all is not lost. In a paper by Michael Emmett Brady, California State University, published in the Social Science Research Network (SSRN) he takes giant steps to demolishing Samuelson’s myth. Michael Emmett Brady writes the most significant contribution to the invsisible-hand debate since 1948:

“Who Taught Paul Samuelson the Myth of the “Invisible Hand” at the University of Chicago? The most likely answer is Jacob Viner or fellow student George Stigler” .

I highly recommend that readers visit the SSRN web site and read Michael Brady’s paper.

There is no substitute for reading Michael Emmett Brady’s relatively short paper. It would be invidious for me to attempt to summarise that which is down-loadable in full from SSRN. I shall quote from Brady’s thoughtful contribution below, but I urge readers to follow his whole argument from its SSRN original:

“Consider Viner’s first quotation:

”It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages ...”

The confusion caused by this quotation usually stems from the failure of a reader of the WN, such as Viner, to understand that the self interest of the WN is the Prudence of The Theory of Moral Sentiments (TTMS,1759), which Adam Smith regarded as his most important contribution because the WN is built, contrary to assertions to the contrary by Viner, on the bedrock of TTOUtility.

Smith would think it obvious to anyone that it is quite impossible for anyone, who has not applied the virtue of prudence first, to be able to exercise beneficence or benevolence because you can’t give to others what you do not have yourself. First, you must take care of yourself. This is also called self love by Smith because it will be futile to attempt to care for others if you can’t take care of yourself first.

Viner’s entire article is continually marred by a steady series of errors made about TTMS (See Brady.2017.Viner’s Erroneous Understanding of The Theory of Moral Sentiments,forthcoming ,SSRN).

Prudence is the virtue of accumulating wealth, also called a nest egg or surplus, over time by hard work, nose-to–the- grindstone, stick-to-activity, planning, parsimony, frugality, and efficient use of one’s resources, so as to maximise the return to one’s labours or business. “the butcher, the brewer, or the baker…” have families, wives, children, brothers, sisters, parents and relatives to raise, feed, clothe, house, educate, and help out occasionally. Profit maximising behaviour in one’s business is the virtue of prudence. It has nothing to do with the Utility maximising interpretation of self interest made by Jeremy Bentham. Therefore, if the “…the butcher, the brewer, or the baker,…” are not very successful, but are just making ends meet, it will be quite impossible for them to exercise benevolence. Thus, the successful application of the virtue of prudence is a necessary condition, but not a sufficient one, for the application of the virtue of benevolence (Charity to others).

I would add a further comment that vindicates our criticism of the modern misreading of Adam Smith reference to “an invisible hand” by Paul Samuelson, and all those who followed his lead uncritically. Consider this sentence from Samuelson 1948, p 36:

“This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their course in economics.” (Samuelson, 1948, p 36).

This persuasive statement by Samuelson is quite “unguarded”, as well as revealing his limited appreciation of Smith’s use of the metaphor and ts influence on readers when first published and for many decades afterwards. Samuelson’s dating the influence of Smith’s use of “an invisible hand” in Book 4 of Wealth of Nations from 1776, was grossly misleading after WN was first published: “the past century and a half” from 1776 takes anonymous readers 150 years to 1926, add the past “30 years” this takes readers to 1956.

However, it is a fact that next to nobody noticed Smith’s reference to ”an invisible hand” while Smith was alive, nor even for long after he died in 1790. His contemporaries ignored his use of the invisible-hand metaphor, as did the overwhelming bulk of 19th-century leading economic authorities until the1870s. The ‘invisible hand’ was ignored and taken as largely theological before and during Smith’s life time, not secularly as Smith used it. Whatever else was the effect of Smith’s secular use of the ‘invisible’ hand, Samuelson’s statements were factually wrong, though Samuelson’s readers apparently were and remain none the wiser.This fact leaves Michael Emmett Brady's readers well informed ahead of the spreading realisation that Adam Smith's casual use of the "invisible hand" did not proclaim a new or significant theory as presented by modern (post-1948) readers. In fact, Smith's "invisible hand" reference was fairly innocent: a merchant investing his capital in a domestic market simply adds to domestic aggregate investment without any needed pre-intention to do so. Surely, an obvious consequence of the merchant's actions, and by the non-reaction of Smith's contemporaries and later luminaries among major political economists, who studied and taught from, Adam Smith's Wealth of Nations until the end of the 19th century and beyond who ignored the supposed significance of the invisible hand. It took Samuelson's genius to give the invisible hand the (albeit, probably unintended) false significance it came to have from the 1960s, and continuing in 2017-18.Michael Emmett Brady has done modern economics (and Adam Smith's political economy) a great service in his SSRN paper.